The Reserve Bank of India (RBI) is set to conduct a significant forex swap auction on February 28, 2025. This auction involves a buy-sell swap of US dollars and rupees worth $10 billion. The primary goal of this operation is to inject liquidity into the banking system.
The RBI aims to address the long-term liquidity needs of the banking system through this auction. By swapping dollars for rupees, the RBI effectively releases additional rupees into circulation, helping to ease liquidity constraints faced by banks.
A buy-sell swap functions by allowing the RBI to buy US dollars from banks in exchange for rupees. Subsequently, banks will repurchase these dollars from the RBI at a predetermined rate, thereby reversing the initial transaction.
No, this will be the second swap auction in 2025. The first auction was a six-month swap worth $5.1 billion, which took place on January 31.
The impact of forex swaps on the rupee’s value is contingent on market dynamics. If the RBI absorbs a significant amount of dollars, it could lead to a depreciation of the rupee. Conversely, injecting liquidity into the system may help stabilize the financial environment.
In addition to the forex swap auction, the RBI has initiated open market operations (OMO) by purchasing ₹60,000 crore worth of government securities. The central bank has also introduced a variable rate repo (VRR) auction of ₹50,000 crore, further enhancing liquidity.
This swap is anticipated to alleviate the ₹1.7 lakh crore liquidity deficit currently affecting the banking system. It also aims to ensure effective transmission of monetary policy. However, the success of this swap will largely depend on prevailing market conditions. A well-functioning financial system is indeed the foundation of a robust economy.
Q1. What is a forex swap auction?
Answer: A forex swap auction involves exchanging currencies, allowing central banks to manage liquidity by providing local currency in return for foreign currency temporarily.
Q2. How often does the RBI conduct forex swap auctions?
Answer: The frequency of RBI's forex swap auctions can vary. In 2025, two auctions have already been planned to address liquidity needs in the banking system.
Q3. What are the benefits of RBI's forex swaps?
Answer: Forex swaps help stabilize the rupee, ensure liquidity in the banking system, and facilitate effective transmission of monetary policy, promoting overall economic stability.
Q4. What is the impact of liquidity on the banking system?
Answer: Adequate liquidity is crucial for banks to operate smoothly, allowing them to meet withdrawal demands and extend credit to consumers and businesses.
Q5. How does the RBI determine the swap rates?
Answer: The RBI sets swap rates based on market conditions, demand and supply for foreign currencies, and the overall economic environment to ensure effective liquidity management.
Question 1: What is the main purpose of RBI's forex swap auction?
A) To increase foreign reserves
B) To inject liquidity into the banking system
C) To stabilize the stock market
D) To reduce inflation
Correct Answer: B
Question 2: How much was the first forex swap auction in 2025?
A) $10 billion
B) $5.1 billion
C) $2 billion
D) $15 billion
Correct Answer: B
Question 3: What does a buy-sell forex swap entail?
A) Selling foreign currency to banks
B) Buying and selling currency at a predetermined rate
C) Exchanging gold for currency
D) None of the above
Correct Answer: B
Question 4: What liquidity measure involves purchasing government securities?
A) Repo rate
B) Open market operations
C) Forex intervention
D) Variable rate auction
Correct Answer: B
Question 5: What is the liquidity deficit in the banking system mentioned?
A) ₹1.7 lakh crore
B) ₹2.5 lakh crore
C) ₹1 lakh crore
D) ₹50,000 crore
Correct Answer: A
Question 6: Which auction type helps in managing liquidity through short-term currency exchanges?
A) Term repo
B) Forex swap auction
C) Government securities auction
D) Long-term bond auction
Correct Answer: B
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